Some experts think the economy is ready for higher interest rates. Others, not so much.
On Friday, we learned from the Bureau of Labour Statistics that US companies added a healthy 215,000 jobs in July, while the unemployment rate declined to a new cycle low of 5.26%. And for most Wall Street economists, that’s enough for the Federal Reserve to raise interest rates for the first time since June 2006.
In its latest policy statement, the Federal Reserve said it could begin hiking rates if it saw “some further improvement in the labour market.” According to at least 13 economists followed by Business Insider, that’s exactly what we got and it’s why we should expect the Fed to make its first rate hike in September.
But keep in mind, the Fed’s actually got two mandates: “maximum employment” and “stable prices.”
With consumer and producer price measures persistently low, and wage growth measures deteriorating, inflation doves believe the Fed has a good case for delaying its first rate hike.
“Those who interpret recent Fed communication as indicating a desire to raise rates soon unless there are signs of economic weakness will expect a hike this year, probably in September,” Societe Generale’s Kit Juckes wrote in a new note to clients. “But anyone who thinks that a lack of inflationary pressure and a sluggish pace of economic growth will result in the Fed keeping rates on hold for longer, will have been equally reassured in their view.”
Juckes summed up the whole debate in a chart of nominal GDP, which combines real GDP and inflation; the sum of employment and wage growth; and the Fed Funds rate, which is the Fed’s benchmark interest rate.
“Fed Funds remain far too low compared to any measure of nominal growth, but the slowdown in the pace of both employment and wage growth reinforces the impression of a very modest economic cycle and a very, very low peak in rates when they finally do rise,” Juckes wrote. In other words, even if the Fed does begin hiking rates, those rate hikes won’t be as sharp as what we’ve seen in the past.
Overall, however, it seems the hawks have the advantage over the doves right now.
“A large part of the current inflation is temporary,” Fed Vice Chair Stanley Fischer said on Bloomberg TV on Monday. “It has to do with the decline in the price of oil; it has to do with the decline in the price of raw materials. These are things which will stabilise at some point.”
Fortunately, the Fed and everyone else has a little bit of time until that September 17 Federal Open Market Committee (FOMC) meeting when the Fed will give us its next monetary policy update.
“There are five or so weeks until the next meeting, and nothing is certain,” Potomac Research strategist and former Fed chair Don Kohn said. “Those who want to hold off will use wage/compensation data to argue that there’s still plenty of slack in the labour market, and they also will cite plunging commodity prices as raising the risk of a global slowdown that will hold back U.S. exports as well as prices.”